Macroeconomic variables underlying synchronisation in probabilities of default of South African companies

Abstract:

This paper estimates the probability of default of South African companies and determines if the
default probabilities are synchronized. It further investigates if a relationship exists between the
macroeconomic variables and default probabilities. Eighty South African companies are analyzed
for the period ranging from January 1997 to December 2010. The study uses the KMV (Kealhofer,
Merton and Vasicek) model to estimate the probability of default while it uses the Dynamic Factor
Model (DFM) to determine synchronization and to extract common factors that drive the
probability of default. The results show that the estimated probability of default trend is able to
depict events that impacted the South African economy, such as the Asian crisis, the dot com
bubble and global financial crisis. The DFM reveals that South African companies’ probabilities are
synchronized and they are to a certain degree driven by the economic environment. The dependency
of defaults on macroeconomic variables and the high synchronization of companies has policy
implications.